UK’s Assault on Freelancing

One of the major achievements of the Thatcher government was reforms to the labour market making the British economy more flexible and competitive.  Part of that flexibility is the option for workers to take on short term roles and companies to employ them – freelancing/contracting. 

The benefits to a company in taking on a contractor are multi-fold.  They may choose to bring in a freelancer to bridge a skills gap or as temporary cover.  Let’s say a medium sized company wants to build an intranet.  They could train up their internal IT team – this may take up to a year and at considerable cost.  They would then build the new system and then the new skills would likely seldom be used again.  Instead the company can bring in a freelancer on a fixed 6 month contract.  They will be able hit the ground running, deploy the solution, train up the internal team and move on.  In this way the company benefits not only from a far faster delivery but also the expertise and experience the contractor brings.  A freelancer will have first-hand knowledge of what works and what doesn’t work from other companies and sectors.

There are also many clear advantages to a worker being employed as a contractor.  They will become specialised in an in-demand skillset earning them an improved renumeration over a permanent contract.  They will have increased choice on what work they perform, focusing on parts of their industry they enjoy the most.  A contractor faced with a difficult client will be able to give a typical 2 week notice and move on to the next role. 

£100bn per Year

This vital type of employment is estimated to contribute to £100bn per year to the UK economy, but sadly it is under dire threat through short sightedness and ignorance.

The assault on freelancing began with the botched introduction of IR35 legislation.  This was intended to close the tax loophole whereby contractors were in effect disguised employees.  This was undoubtably an issue – with reports of some companies employing contractors for decades in the same role.  IR35 legislation was intended to force companies to treat these “contractors” as PAYE employees and pay the correct tax.  A role deemed inside of IR35 is essentially taxed as a standard permanent employee of the company.  Few would argue with the need for a fair way to tax all workers the same but the application of the clumsily implemented legislation has led to the baby being thrown out with the bath water.

Tax Myth

A popular misconception is that contractors are simply doing the same work as permanent employees but avoiding tax.  We have already seen how freelancers perform a vital expert role in the economy.  As for paying less tax than permanent employees this may have been the case in years past but now it is highly inaccurate.  A contractor who takes a role outside of IR35 will be paid via a ltd company.  Firstly, the company will pay corporation tax on all earnings.  The contractor will typically will take a small salary and pay the rest in dividends.  These dividends will then be subject to dividend tax.  In effect, any savings of National Insurance are offset by other taxes – which ultimately just wind up in the same pot.  For a detailed analysis see this excellent article –

https://www.peoplemanagement.co.uk/article/1741750/do-contractors-pay-less-tax.

During the Covid 19 lockdown contractors were hit with a double blow.  Whilst in his role as Chancellor, Fishi Sunak refused to extend furlough to contractors and this combined with many being laid off due to the pandemic.  Some contractors were paid furlough payments on their small PAYE salary but not all.  A consultant who spoke to the Herald, complained that as their payroll salary had not started before the cut-off date they were entitled to absolutely no furlough payments at all. 

Many contractors faced with these head winds have chosen leave the profession and often even the country.  The Herald, speaking to recruitment agents, has learnt that many organisations have struggled to find the expertise they need.  This has been particularly prevalent in the public sector where expensive large consultancies have had to be brought in to deliver projects that would have previously have been delivered inhouse with contract labour.  There has been an inevitable effect on the cost and quality of projects – and this will only worsen.

The government seems to be choosing to denigrate the role of freelancing in favour of large offshore consultancies, such as say Infosys.